Real estate pros reunited

Robert Zulkoski created a stir when he left Colony Capital Asia Pacific in 2004 to set up Pangaea Capital Management, an Asia-focused special situations fund manager. Earlier this year, Pangaea became part of Oaktree Capital Management, a US alternative investment group with big plans for the region. The sale has thrust Zulkoski back into the spotlight and brought him back together with former colleagues at Colony. In September, Sharon Lim met him to learn how and why it all happened.

Robert ‘Bob’ Zulkoski is no stranger to Asia. The continent has been home since he first arrived in 1994 with GE Capital as managing director of the company's Asian commercial real estate finance and services group. Next the American morphed into a founding member of Oakwood Asia Pacific, a service apartment manager, which in 1998 was acquired by Colony Capital, the private equity giant led by legendary real estate investor Tom Barrack. As part of the deal, Zulkoski changed jobs to lead Colony's activities in Asia.

After Colony had become one of the largest private equity real estate operators in the region, a “desire to do something on our own” spurred Zulkoski and a few of his colleagues to set up their own business. In 2005, a team of largely real estate investment professionals created Pangaea Capital Management to venture into distressed and special situations investing. Fundraising for a $1.5 billion debut fund began.

Marketing the fund was not easy, as Pangaea experienced the kinds of challenge many first-time funds have to face. During its first year in business, the firm formed and then had to dissolve a fundraising joint venture with Pequot Capital, a US hedge fund, after the latter came under investigation for insider trading. Zulkoski declines to disclose how much the maiden fund has raised. Market sources say the fund has not reached target and by 2006 had attracted approximately $300 million.

Nevertheless, Pangaea has been busy doing deals. According to Zulkoski, the firm has participated in approximately $2 billion worth of transactions to date, $1.2 billion of which came in 2006 with just over 50 percent in direct and indirect real estate investments. Pangaea was part of a consortium that acquired a 5.6 percent stake in Korea's Daewoo Engineering and Construction for $520 million. A pending investment is the purchase of a stake in Huaxia Bank, a Chinese lender, which the government is yet to approve.

All told, Pangaea has invested $720 million in equity, Zulkoski says, including significant co-investment from the firm's limited partners. A sidecar fund through which the firm's backers were able to participate directly in the firm's investments was a success, he says: “Every single investment presented a co-investment opportunity so every LP was provided a fairly robust description of every deal. And all LPs like more information.”

Earlier this year, big changes beckoned once again. Two months ago, on 17 September 2007, Oaktree Capital Management, the Los Angeles-based alternative investment and distressed debt specialist led by Howard Marks and Bruce Karsh, announced the acquisition of Pangaea to spearhead its real estate investment efforts in Asia.

Under the deal, Pangaea's 25-strong team, which is spread across offices in Singapore, Shanghai, Seoul and Tokyo and includes Steven Choi, CEO of Korea; Steven Lee, CEO of Greater China; and chief financial officer Kenneth Tang, will be integrated into Oaktree's operations. Zulkoski, who owns a controlling stake in Pangaea, will serve as managing director and head of real estate in Asia.

THE FRIENDLY GUYS
So he and his partners are back in the fold of yet another large investment firm with global ambitions. The move may seem like a personal exit, but Zulkoski, unsurprisingly perhaps, points to the transaction's synergistic benefits for the business going forward.

During an interview with PEI Asia at Pangaea's offices in Singapore, he says: “My vision for Pangaea was to build a preeminent Asia-based focused alternative investment management platform with a number of synergistic funds founded on certain core principles. In my view, being part of Oaktree can accelerate achievement of the vision as Bruce Karsh and Howard Marks have created the kind of firm I'd envisioned – one that is multi-faceted, multidimensional, global, and yet collaborative and collegial.”

At the outset, Pangaea was built on the belief that Asia continued to generate attractive special situation opportunities and corporate spinouts despite the rescue and reform measures that had followed the region's 1997 currency crisis.

Added to the formula was an emphasis on what Zulkoski describes as “truly local deals” in order to effectively compete for deals in countries such as South Korea where nationalistic and sometimes xenophobic tendencies had started to rise.

He says: “Our whole approach is based on local empathy and respect. Local sellers prefer to deal with local buyers. We are not out to make a killing on each deal, we're offering acceptable solutions based on long-term greed rather than short-term greed.”

Zulkoski also insists that Pangaea is the “complete opposite” to an activist investor: “We are the friendly guys and we want local companies to come to us because we can be empathetic to their needs and be part of the local solution.”

THE COLONY CONNECTION
So why look for special situations in Asian real estate today? Zulkoski, first of all, points to the importance of property in Asian investment portfolios. “In most of Asia, there is a lack of social safety nets. Asians save more for this reason, and real estate is a primary vehicle for these savings.”

He also believes that the impact of the US subprime mortgage meltdown will bring disruptions and inefficiencies to the market that will play into the hands of the Pangaea/Oaktree platform:“In some respects when [market sentiment] is bad, it is good [for us]. If it gets worse, it is better.”

In addition to offering strategic benefits, Oaktree's purchase of Pangaea has brought some former colleagues back together. Oaktree, which has about $50 billion under management, has been pushing hard into Asia in recent months. The firm already has offices in Beijing, Singapore and Hong Kong, where Ralph Parks, a former CEO of JP Morgan Asia Pacific, overseas Asian activities as chairman. An Asia-specific private equity fund, OCM Asia Principal Opportunities, closed in the summer on $577 million. The launch of a separate real estate fund for Asia is expected. And earlier this year, the firm hired John Brady, previously a principal at Colony responsible for the firm's North America acquisitions, as global head of real estate. This is key to understanding the tieup of Oaktree and Pangaea, because Brady and Zulkoski go back many years.

They first met during America's savings and loan crisis in the early 1990s when Colony and GE Capital partnered to invest in one of the first Resolution Trust Corp. transactions in the US, a deal that involved $1 billion of non-performing loans secured by real estate collateral.

In 1998, the pair crossed paths again after the collapse of the Thai baht, as well as a number of other Asian currencies, prompted Tom Barrack to take Colony into Asia. Brady was assigned to lead the charge and oversaw the investment into Oakwood Asia Pacific, the deal that ultimately led to Zulkoski becoming a full-time Colony employee.

After joining Oaktree in 2007, Brady began looking for like-minded investors in Asia. “The first call I made at Oaktree was to Bob, to see how we can get the old band back together,” he told PEI Asia in a telephone interview in October.

Brady credits Zulkoski for Colony's success in Asia: “As chief executive officer of Colony Capital Asia Pacific from 1998 to 2004, Bob built local offices in Japan, Korea, China and South East Asia, led approximately $2 billion worth of transactions, and generated attractive returns for the investors.”

Having made the initial approach to his old colleague, who at the time was fundraising in the US, Brady followed up by introducing him to Oaktree president Bruce Karsh.

Zulkoski met Karsh as well as a number of senior partners at Oaktree, and the day's discussions ended with “Oaktree deciding they did not want to collaborate, but they quickly followed up on an expression of desire to buy Pangaea instead,” Zulkoski recalls. A handshake over a meal in Los Angeles some time in early summer sealed the deal.

CLOSING THE FUNDRAISING GAP
Zulkoski cites three principal reasons for giving up Pangaea's independence in favour of becoming part of a global franchise.

Firstly, the geographic blend makes sense he says: Pangaea's Asia focus complements Oaktree's strength in distressed debt and high-yield bonds in the US and Europe. Zulkoski says Pangaea has increasingly been sourcing complex, cross-regional transactions, which has brought the firm into regular competition with the global private equity groups that have recently made their way to Asia. The merger with Oaktree completes each party's capabilities to underwrite these opportunities.

Secondly, financing deals will be easier. Zulkoski says the team has identified deal flow in excess of $6 billion but as a first time fund, sourcing equity capital in the marketplace has been a challenge. Joining Oaktree closes “the gap between the volume and velocity of deal flow versus the volume and velocity of our fundraising efforts”.

A third crucial factor is chemistry: the core Pangaea team has been together for nearly ten years, and Zulkoski is proud of the esprit de corp among his team. Yes, surrendering Pangaea's independence was a huge issue initially. But Brady and other Oaktree principals around the world have displayed a collaborative and collegial spirit across teams that the Pangaea executives are comfortable with:“They walk the talk,” Zulkoski sums up what he likes about the Oaktree culture.

As for himself being part of a hierarchical structure once again, he says there is no problem: “I don't care about taking credit. Credit should be shared equally amongst the team, but criticism gets borne by the leader,” he explains.

Now that a new ownership structure is in place – Brady declined to disclose the financial details of the takeover, but said cash and shares in Oaktree's publicly listed management company were part of the deal – the challenge is to get the new machine humming.

Zulkoski is confident results will come soon and says the firm's investors are looking forward to things to come as well: “Ultimately, our investors saw the same thing we did. If we were good before, this will make us better. Universally, our LPs have seen the benefits of this integration.To have a firm like Oaktree recognise Pangaea is testimony of our investment capability and validation of our approach.”

The timing could prove smart as well: at a time of widespread uncertainty in global credit markets and Asian real estate high on the agenda of investors globally, the Colony Capital veterans and their Oaktree colleagues have plenty to aim for.